Is The Japanese Consumer Losing Faith?

The big question this week in Japanese data is whether the economy can sustain the gains made so far by Abenomics.

The extraordinary monetary stimulus pushed by Prime Minister Shinzo Abe has made big gains across the board, boosting economic growth this year. Consumption has picked up and exports have done well, supported by a weaker yen.

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A shopper walks past an apparel shop in Tokyo.

But signs are emerging the shoots of consumer confidence could already could be wilting.

Last week, subdued department store sales set off alarm bells. On Thursday, preliminary retail sales figures brought more bad news, falling 0.3% on year in July. On a seasonally adjusted basis, retail sales were down 1.8% on the previous month, the biggest fall since August 2011.

Japanese officials are keen to point out that extreme heat and rain in July, which kept shoppers inside, plus one less Sunday in the month compared to the year-ago period, might have given a one-off blow to the numbers.

Officials also pointed out that summer bonuses this year were likely spent in June, damping outlays in the following month.

Still, economists aren’t as convinced the number can be written off.

The problem is that increased economic activity hasn’t translated into more investment by firms. Companies, especially those in the manufacturing sector, still have large amount of spare capacity. Workers’ wages aren’t rising, even as inflation begins to creep up in Japan for the first time in years, which could throw some cold water over the recent optimism.

“The sharp drop in retail sales in July casts doubt on the ability of ‘Abenomics’ to boost private consumption,” wrote Capital Economics economists in a note. “Households are probably well aware that once the summer bonus season is over, wages will likely continue shrinking, depressing their purchasing power.”

That would be bad news for Mr. Abe, who has made it his mission to reverse nearly two decades of deflation – a cycle of falling prices and wages that has depressed spending by businesses and individuals. Consumer spending makes up 60% of annual gross domestic product.

SMBC Nikko Securities strategist Mari Iwashita said higher import prices – a consequence of the weak yen – and a lull in the stock market have “chilled consumer sentiment.” Ms. Iwashita said consumers will have to keep spending if Japan is to overcome deflation.

Now, Japan watchers will be turning to household spending survey data for July due Friday for more signs of which way things are going. Other data tomorrow, including consumer prices, housing starts and employment, will also be keenly watched.

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